Market Cycle Analysis In our research of John Hussman’s performance, we observed that he underperformed the market if we look at the latest 3-year annualized return, 5-year annualized return and even 10-year annualized return. Yet this might not be the case if we look at his performance over a complete economic cycle.

We believe that the performance over fixed time periods, like the latest 3-year, 5-year and 10-year, might be misleading since a single bad year performance would ruin all. Therefore, we believe the best way to measure funds’ performance is to check the performance number over complete market cycles.

According to the annual returns of S&P 500 from 1999 to 2012, we think market peaks appeared at 1999, 2007 and 2012, while market troughs appear at 2002 and 2008. Based on this, we research all the funds’ performance from peak to peak (1999 to 2007, 2007 to 2012, and 1999 to 2012) years and trough to trough years (2002 to 2008).

The results are as follows (we ignore the funds which lack at least two years of data in a complete economic cycle):

For the fund type, h means hedge fund, m means mutual fund, f means fund and i means investment company. The yellow marked line is the S&P 500, and the green marked line and the above are the top 20 gurus for each complete economic cycle. From the above four tables, we can see Daniel Loeb, Mawer New Canada Fund (Canadian Guru), Robert Bruce, Jean-Marie Eveillard, Chuck Royce, Ken Heebner, John Paulson, Bruce Berkowitz, Chuck Akre and Prem Watsa did a pretty good job for at least three complete economic cycles. Almost all the funds outperformed the market during 1999 to 2007, 1999 to 2012 and 2007 to 2012, yet due to the financial crisis, only 55% of the gurus outperformed the market. From 2007 to 2012, Prem Watsa, David Rolfe, Daniel Loeb, Donald Yacktman, as well as Warren Buffett did the best in beating the market. We need to mention that Canadian gurus, including Mawer New Canada Fund, Mawer Canadian Equity Fund, Signature Select Canadian Fund, CI Can-Am Small Cap Fund and Leith Wheeler Canadian Equity, performed well during these time periods.

Five-Year Rolling Analysis

In order for us to better assess the performance of those funds, now we use five-year rolling basis to analyze our funds. This methodology is commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends. In Berkshire Hathaway Inc. (BRK.A)(BRK.B)’s annual report of 2012, Warren Buffett mentioned this methodology. We first calculate the five-year rolling annualized returns for each fund from their inception date to today, then compare them with five-year rolling annualized returns of the S&P 500, and finally we calculate the percentage of years when each fund outperformed the market. We ignore those funds which had less than eight five-year rolling returns from 1980 or their inception date, whichever comes first, to 2012.

The results are as follows:

Table 5: Percentage of Years When Guru Outperformed the Market (Five-Year Rolling Basis)

From above table 5, we can observe Warren Buffett, Daniel Loeb, Westport Asset Management, Diamond Hill Capital and CI Can-Am Small Cap Fund (Canadian Guru) outperformed the market for all the years since 1980 or their inception date using a five-year rolling basis. Besides, almost all the top 20 Gurus of table 5 show up on the top 20 Gurus of the peak-to-peak and trough-to-trough tables we mentioned above.

Conclusion

In general, the Gurus we track did well in complete market cycles. They do not outperform the market all the time. They may even underperform the market over three-year and five-year periods. But over complete market cycles, most of them outperformed the market.

In the five-year rolling periods, 21 out of 65 Gurus can outperform S&P 500 over 80% of the time. Fifty of them can outperform S&P 500 over 60% of the time. And 56 of them can outperform the S&P 500 over 50% of the time. These facts again prove that the Gurus we track did well since 1980 or their inception date, whichever comes first.

The above two methods of analyzing funds’ performance are good if you are a long-term investor. They might not be a suitable way if you want to invest in a shorter time period.

Thanks for doing the analysis. I think the outcome and conclusions are quite interesting, though it's disappointing that some of the very best Gurus are missing (in particular Steve Mandel and Glenn Greenberg, to mention two of my own personal favorites).

A question and a suggestion:

1. In the case of Tweedy Browne, Third Avenue, Weitz and others which have multiple funds, which fund(s) did you use for the assessment and why?

2. Given that wealth creation is the endpoint of investing, I wonder if it would be worthwhile to look at the growth of say a $10k investment as a function of time from inception for the funds you used. A graphical display would be most revealing.

Thank you for a great piece of investing "homework". This is just a fantastic table of results from some very tedious calculations. The end result? Putting into perspective the returns of gurus over various select time/market periods.

I have just gone over it once. It will take me a couple more times to understand it.

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